2021 Economic Outlook: Light At The End Of The Covid-19 Tunnel
The COVID-19 global recession has been different from past recessions during which the service sector experienced smaller declines than manufacturing. In the current crisis, the service sector bore the brunt of the decline due to the public health response and individual behavioral changes needed to slow the transmission of the virus. Were it not for the sizable, swift, and unprecedented policy response that maintained disposable income for households, protected cash flow for firms, and kept credit flowing, the global recovery would have been much weaker and slower. Central banks and governments in both developed and emerging economies delivered policy support of around $28 trillion, or 33% of global GDP, in monetary and fiscal stimulus, including $10 trillion in the US, or 48% of US GDP. Figure 1 compares the response of global central banks this time around to their actions during the Global Financial Crisis and Great Recession of 2008-09. Collectively these actions prevented the pandemic and resulting economic collapse from morphing into a longer-lasting financial crisis and a repeat of the previous global crisis, according to the International Monetary Fund.
Figure 1: Current Policy Response Dwarfs GFC Response
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Source: Haver Analytics, PGIM Fixed Income. As of 11/30/20.
Game changing news on the speedy arrival of effective COVID-19 vaccines arrived late last year, and this development should bolster the 2021 global economic recovery. While the vaccine rollout may be off to a slow start, we expect production, mass distribution and inoculation to ramp up significantly in the next six months. Consensus forecasts incorporate expectations for a V-shaped economic recovery in 2021 (Figure 2). Given pent-up demand, inventory restocking, supportive financial conditions and potential for rising “animal spirits,” we see upside risks to global growth forecasts. Fresh fiscal stimulus and continued monetary accommodation could add even more fuel for the recovery.
Figure 2: V-Shaped Recovery for global Economy in 2021
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Source: Bloomberg. As of 1/22/21. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this document.
The 2021 recovery will likely be uneven across countries, with stronger rebounds in countries and regions that have better controlled the virus and distribute the vaccine more quickly, enabling a faster relaxation of economic restrictions. China, in particular, started its recovery sooner and should see a strong expansion this year; we think China will be a key driver of global growth for both emerging and developed economies in 2021.
While the initial rebound from the pandemic-induced recession has been faster and stronger than expected, the pace of global growth slowed in the fourth quarter of 2020 due to the resurgence of the virus, which has triggered renewed lockdowns and restrictions on activity. This weakness appears to have extended into the first quarter of 2021 (Figure 3). However, fresh fiscal stimulus approved in late 2020 and additional stimulus proposed by the Biden administration is likely to provide a bridge to the spring and mid-year when vaccines are more widely available and a larger percentage of the population is inoculated.
Figure 3: COVID-19 Resurgence Delivers Temporary Growth Setback
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Source: Bloomberg, Alternative Activity Indicators based on high frequency data from Google Mobility, Moovitapp.com, German Statistical Office, BNEF.com, Indeed.com, Shoppertrack.com, Opportunity Insights. As of 1/21/21.
With the Democrats controlling both the US House of Representatives and the Senate (albeit by the slimmest of margins) another stimulus package is in play, although it likely will be smaller than the $1.9-trillion package proposed by the Biden administration. Still the package is likely to be substantive with spending on healthcare, education, climate-change mitigation and transfer payments in the mix. This spending is likely to be partially offset by tax increases on corporations and individuals. We think additional fiscal stimulus is likely in Europe, Japan and several emerging economies.
Inflationary pressures are likely to remain under control in 2021 (Figure 4), with most economies still operating at below full-capacity levels, especially in labor markets. High levels of precautionary savings due to economic and health anxieties related to the pandemic should also keep inflation pressures at bay. Price pressures could build if pent-up demand fuels a surge in spending on services that consumers had been forced to forego due to lockdowns and restrictions on movement. For example, hotels and airlines could see significantly improved pricing power stemming from a vaccine-related bout of Spring Fever vacation splurges. Supply may not be able to keep up with surging demand in certain sectors, as capital projects may have been put on hold, or temporary supply disruptions could cause higher production costs and/or supply bottlenecks. However, we think any price spikes related to these issues are likely to prove temporary and isolated as the deep structural economic forces keeping inflation low have not abated. These include aging demographics, technological innovation and automation, global competition, high debt levels, and inequality. The policy environment presents a source of longer-term inflation risk because central banks are likely to maintain ultra-low policy rates for an extended period and continue with bond purchases in the context of rapidly rising government debt levels, which increasingly is seen as debt monetization. This is resulting in rising inflation expectations at desirable levels currently but could present risks down the road if these policies are maintained for too long.
Figure 4: Inflation Likely to Rebound but Stay Low
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Source: Bloomberg. As of 1/22/21. There can be no assurance that forecasts will be achieved. Please see additional disclosures at the end of this document.